The Second Generation and Self-Employment

October 1, 2006

Feature

By Steven J. Gold, Ivan Light, M. Francis Johnston

Since the 1970s, social scientists have understood the importance of self-employment as a vehicle for economic advancement among immigrant populations. Studies reveal that the foreign born have higher rates of self-employment than do natives, and that self-employed immigrants have greater wealth, earnings, and returns to human capital than immigrants who find jobs in existing firms.

While the foreign born in general have higher rates of self-employment than the native born, certain nationality groups have especially high rates of self-employment. Research suggests such groups are characterized by a combination of disadvantages and resources in the U.S. economy that propel them to high rates of entrepreneurship.

Disadvantages include lack of English proficiency, membership in an ethnic/racial group that experiences discrimination, and a lack of credentials (or credentials from unrecognized foreign universities). Resources include skills, education, and access to networks that provide labor, capital, information, advice, imported goods, and customers.

These findings have been replicated in studies conducted in a variety of nations, locations, and economic activities. However, the greatest body of literature on immigrant entrepreneurship has concerned the first generation. Far less is known about patterns of self-employment among the descendents of recent immigrants — about 30 million in all, including those who arrived before the age of 13, as of 2005.

Accordingly, a study of the second generation's involvement with self-employment promises to yield valuable insights into this group's experience of assimilation and, as such, broader social and economic patterns in U.S. society for years to come. By analyzing data on self-employment in New York and Los Angeles, it is possible to determine if self-employment is a trend among the second generation.

Much of the early research and theorizing on immigrant entrepreneurship focused largely on the supply of entrepreneurs. This work was little concerned with the contexts in which such businesses functioned.

However, in the last decade, scholars have directed their attention to the societal and communal conditions that shape demand for entrepreneurship. Such work examines the growth of entrepreneurship within a changing opportunity structure, a clear improvement over earlier formulations that disregarded context in assessing prospects for immigrant self-employment.

Research has determined that the conditions fostering increased demand for ethnic and immigrant entrepreneurship are quite complex and not simply a consequence of general economic trends.

As sociologist Saskia Sassen argues, despite the apparent decline in stable employment opportunities for less-educated laborers in major cities, transitional and even impoverished neighborhoods often need the kinds of goods and services that immigrant entrepreneurs are willing and able to provide. Given that corporate businesses are largely uninterested in servicing such markets, it is immigrant entrepreneurs who often meet this demand.

Low-income migrants and economically dislocated native workers, however, are not the only consumers of goods and services sold by immigrant shop owners. In recent years, affluent workers and the firms that employ them also increasingly consume goods and services — from prepared food, remodeling services, and childcare to packaging, delivery, and garment assembly — that are conveyed by immigrant entrepreneurs.

At the same time, it is important to note that prospects for immigrant self-employment are not universally positive. For example, during the late 1990s, corporations that had long ignored inner-city customers began to recognize the profits available in servicing this market. As a consequence, immigrant-owned businesses that could not stand up to such well-financed competitors lost some of their traditional control over this niche.

First, the proportion of every second-generation group with college or advanced degrees was greater than the first. Second, there was evidence of a rise in occupational prestige across the board for all comparisons of second to first generations. Third, second-generation groups had lower poverty rates, a higher percentage of people in a comfortable economic position (meaning incomes five times higher than the poverty rate), and substantially higher per-capita incomes than the first generation.

The data also showed that nationality groups characterized by relatively high levels of education in the first generation demonstrated better second-generation progress in terms of income and educational advancement than those groups, such as Mexicans, who entered the United States with less education. This finding is sobering since the Mexican-origin population is the largest of all nationally defined migrant groups; low levels of mobility could affect a large fraction of the second generation.

Models of Second-Generation Self-Employment

There are a number of reasons the U.S.-born children of immigrants are less likely than their parents to pursue self-employment. A large body of research on intergenerational immigrant adaptation confirms that while first-generation migrants reveal high rates of self-employment, their children obtain a college education and secure professional jobs in existing firms or the public sector.

This pattern is called the classic model of generational succession in self-employment. The children of self-employed immigrants who arrived in the late-19th and early-20th centuries (commonly called the last "great wave") generally fit the classic model.

Unlike their parents, members of the second generation then and now are often more proficient in English, have more knowledge of American society, and have higher levels of education, with degrees earned from U.S. educational institutions.

At the same time, members of the second generation often lose certain ethnic entrepreneurial resources, such as access to migrant networks and skills, including competence in the parents' language and an appreciation of earnings differentials with the country of origin. Finally, the second generation may lack the motivation and determination of their parents, who made the conscious choice to take advantage of opportunities in a new environment largely unfamiliar to them.

Considering the great diversity in levels of skill, access to resources, demographic characteristics, cultural propensities, and contexts of reception among contemporary migrant populations, it is likely that various patterns of generational change in self-employment rates occur. Below are other possible models.

Second-generation starters. Given that entrepreneurship requires resources, it is conceivable that some members of the first generation lack sufficient assets to start their own businesses, even if they would like to do so. However, as a consequence of growing up in the United States, members of the second generation may acquire such resources while retaining a desire to become self-employed. Accordingly, members of the second generation may reveal higher rates of self-employment than their parents' generation. Historically, this pattern was observed among Jewish immigrants in New York.

The middleman model. In this pattern, the second generation of groups with high rates of first-generation self-employment retain high levels of self-employment. Some members of the second generation of these highly entrepreneurial groups are not heavily oriented towards educational achievement because they plan to enter the accessible ethnic economy where a large fraction of their coethnics find work. The most dramatic configuration of this model is revealed among contemporary, public-school educated Cubans in South Florida and Chaldeans in Detroit.

Second-generation decline model. Children of marginally successful self-employed parents may reveal lower rates of self-employment than the first generation, but they may not experience the upward mobility predicted by the classic model. Rather, in a process described as "niche shrinkage," ethnic-owned economies decline over time, because demand for goods and services reduces or because competition from other entrepreneurial groups and corporate businesses cuts into consumer demand.

The second-generation decline scenario is evidenced by the second generation having relatively low rates of education, self-employment, and income as compared with the first generation. While not a broad trend, this did occur to the owners of urban businesses — especially from the 1950s until the 1980s — when sizeable areas of cities such as New York, Newark, Detroit, Chicago, and Los Angeles lost their economic base and population.

Some displaced second-generation entrepreneurs (children of immigrants who entered the United States prior to 1930) were able to reestablish enterprises in suburban regions, the Sunbelt, or in gentrifying neighborhoods, but others were unable to do so. As a result, some worked as employees in coethnics' stores in order to supplement their depleted retirement funds.

Transnational entrepreneurs. In this pattern, the second generation of groups with relatively high resources retains high rates of self-employment because of ample rewards available from businesses that operate in the United States and the parents' country of origin. For example, Portes and colleagues reported in 2002 that more than five percent of the Salvadoran, Dominican, and Colombian first-generation migrants they studied followed this pattern.

These first-generation transnational entrepreneurs relied on frequent travel and constant contact with other countries, earned higher incomes, and were more likely to be citizens than conational migrants who were not self-employed. Scholars have documented similar patterns among second-generation Chinese and South Asian populations.

A related phenomenon involves the children of migrants leaving the United States permanently to engage in self-employment in the parents' country of origin or a third national location.

Methodology

In order to examine intergenerational patterns of self-employment, five years' worth of annual data files (1998 to 2002) from the Current Population Survey (CPS) from New York City and Los Angeles County were analyzed. Data were prepared by Charlie Morgan for the Immigration and Intergenerational Mobility in Metropolitan Los Angeles project. These cities were chosen because they are the two largest points of migrant settlement in the United States and are home to large numbers of the second generation.

The CPS data are rich, and, unlike the 1990 and 2000 Census, provide information about parents' birthplace, allowing respondents' generation to be considered. On the other hand, given the relatively small number of individuals sampled and the young age of the second generation, the number of self-employed of particular nationalities residing in each city was so small that it would be very difficult to make broader generalizations on the basis of these data, especially when considering gender.

In order to increase the size of the second generation for analysis, the 1.5 generation (those who arrived in the United States before age 12) were included. As a consequence, some of the patterns that may reflect the experience of the 1.5 generation rather than a U.S.-born cohort per se.

Further, given that self-employment rates increase with age, the relative youth of the second generation itself is likely to be associated with lower rates of self-employment than would be the case if their mean age were greater. With the exception of the British in both cities and Mexicans in Los Angeles, the size of every second-generation group (age 20 and above) was smaller than the first generation.

The survey defines the self-employed as those persons who work for profit or fees in their own business, profession, trade, or farm. Because only the unincorporated self-employed are included in the self-employed category, neither small, part-time "side" businesses nor large incorporated enterprises are included in these data.

A final problem is that of comparison between the two cities. Different nationality groups settle in New York and Los Angeles. Accordingly, it is difficult to find large enough samples of the same group in both cities to make appropriate comparisons.

Self-employment is an incredibly diverse activity, including very small-scale, home-based businesses and considerably larger operations. Hence, without further analysis, the nature and economic impact of the various kinds of businesses included in these data cannot be determined.

These limitations accepted, the following groups were selected for analysis: Salvadoran, Mexican, Filipino, Chinese (including persons from Hong Kong, Taiwan and China), Korean, Iranian, British, and native white. In both cities, at least a minimal number of each group is self-employed.

In addition, the various groups represent social and economic characteristics that the broader literature on ethnic economies has identified as relevant to patterns of self-employment. Most Mexican and Salvadoran immigrants are less-educated migrants who may lack legal status and hence are likely to have low rates of self-employment. Since Filipinos generally have high educational profiles and know English, they often find employment in existing firms.

Chinese, Koreans, and Iranians are noted for high rates of self-employment and developed ethnic economies. In New York and Los Angeles, all three groups are associated with garment firms and various professions. Both Chinese and Korean immigrants run restaurants and import-export firms. Koreans are active in retail sales, small grocery and liquor stores, and dry cleaners; Iranians are active in real estate.

British represent the "old" second generation whose parents arrived prior to the mid-20th century; they are not subject to racial discrimination. Finally, native-born whites provide a baseline for comparison between migrants and the majority population.

Findings

In general, most groups retained a fairly stable rate of self-employment between the first and second generations.

In Los Angeles, there was a trend towards increases in rates of self-employment among the 1.5 and second generations. Koreans and British were the only LA groups that revealed a generational reduction in rates of self-employment (see Table 1).

In New York, where the native-white rate of self-employment is considerably lower than Los Angeles, four of the seven migrant groups showed declines in self-employment. This can be seen among second-generation Filipinos, Chinese, Koreans, and British. However, the rates of decline for Koreans and Chinese in New York were quite small, less than 0.5 percent.

Interestingly enough, all of the groups that saw intergenerational rates of decline in self-employment are highly educated, defined as having above 25 percent or more college graduates in the second generation. In this, the classic model (in which rates of self-employment are predicted to decline among the second generation) appears to most directly apply to groups with ample educational resources.

In contrast, increasing rates of self-employment over the generations may suggest that the second-generation-starters model applies to less well-educated groups like Mexicans and Salvadorans.

While highly educated, Iranians showed rates of intergenerational increase in self-employment in both New York and Los Angeles. Their experience conformed to the middleman model in which groups retain high levels of self-employment across generations.

Although levels of self-employment decreased in the second generation, Koreans and Chinese also revealed high rates of entrepreneurship in both generations, and could be classified as adhering to the middleman model as well.

Despite important exceptions, rates of self-employment among these immigrant groups rarely exceeded those of native-born whites for either generation, especially in New York. Hence, these groups may be making intergenerational progress towards the rate of self-employment associated with native-born whites. This pattern is consistent with the predictions of straight-line assimilation, where, with the passage of time, immigrants behave more like the native born.

There are some interesting gender differences as well. The women of several groups in both New York and Los Angeles revealed decreasing rates of self-employment, (including rather drastic reductions among Korean and British women in both New York and Los Angeles).

However, among Salvadoran and Filipino women in Los Angeles, there was a large generational increase in self-employment. For Salvadoran women, self-employment increased from 11.8 percent for the first generation to 17.6 percent for the second generation. Filipino women in Los Angeles nearly doubled their rate of self-employment from the first to second generation, from 7.6 percent to 14.1 percent.

City Differences

For all groups (immigrants, the second generation, and native-born whites), Los Angeles reveals significantly higher rates of self-employment than New York (15.8 percent for Los Angeles, versus 11.2 percent for New York). Of the seven groups, the average rate of self-employment for the first generation in New York was 8.5 percent. This is considerably below the rate of 11.2 percent for native-born whites.

Among the second generation in New York, the rate of self-employment rises to 13 percent. This figure exceeds the average for native-born whites in New York. However, excluding the tiny number of New York Iranians who showed a six-fold increase in self-employment between the first and second generations, the average rate of self-employment for the second generation in New York is 9.9 percent, still well below the average rate of self-employment for native whites in New York.

In contrast, the average rate of self-employment for first-generation Los Angeles immigrants is 16.7 percent, a figure greater than the 15.8 percent rate for native-born whites. Second-generation LA immigrants reveal a very small reduction in the self-employment rate, to 16.4 percent, still above the rate for native-born whites.

Hence, self-employment rates for both natives and the foreign-born are considerably higher in Los Angeles than New York. Moreover, in Los Angeles, these seven foreign-born nationalities and their descendents maintain rates of self-employment that, on average, exceed the self-employment rate of native whites.

In contrast, in New York, these seven groups and their descendants, on average, have lower rates of self-employment than do native-born whites. However, they show a greater generational increase in their rates of self-employment than is found in Los Angeles.

Conclusions

This preliminary examination of self-employment among the second generation suggests that rates of self-employment remain relatively stable over generations. Consequently, the classic model of immigrants' children pursuing professional work instead of self-employment — though relevant to Chinese, Koreans, and British in both New York and Los Angeles — may not apply to all groups in this study.

Conforming to the category of second-generation starters, second-generation Mexicans and Salvadorans, among those with the least-educated parents, showed consistent patterns of generational increase in self-employment. Second-generation Iranians conformed to the middleman model in which groups retain high levels of self-employment across generations.

On a positive note, there was little evidence of second-generation decline, the model that expects relatively low rates of education, self-employment, and income among the second generation as compared with the first generation.

Since the involvement of these populations in activities outside the United States cannot be determined from CPS data, there is no way to evaluate the extent to which they are involved in transnational entrepreneurship. However, case studies and anecdotal evidence do offer some evidence for the existence of this pattern.

There is also a clear indication of regional differences in rates of self-employment. A possible explanation for Los Angeles's higher rates of self-employment across all groups is population growth. From 1990 to 1998, the population of the Los Angeles Metropolitan Area increased nearly three times as rapidly (8.6 percent) as did that of the New York Metropolitan Area (2.9 percent). During that time period, Los Angeles added some 1,250,000 new residents while New York City (which is 22 percent larger) added only 559,000 new residents.

Future research might further consider additional reasons for different regional rates of self-employment. Are they due to regional economic trends, the characteristics of local migrant populations, or other differences between the two cities?

These results should be interpreted with caution because of the small sample size and the low average age of the second generation. That said, if rates of second-generation self-employment continue to grow, then their economic adaptation can be considered distinct from that of the children of the last great immigrant wave, whose actions were typified by the classic model.

Recent economic changes, including economic globalization and the decline in well-paid, unionized jobs, may encourage immigrants and their children to turn to self-employment in order to acquire higher wages and more control over working conditions than is available from jobs in existing firms and the public sector.

Sources

Farley, Reynolds and Richard Alba. 2002. "The New Second Generation in the United States" International Migration Review 36 (3): 669-701.